Fifteen banks in the U.S., the U.K. and Europe with global capital markets operations saw their ratings cut Thursday by Moody’s, some by as many as three notches, as the ratings agency continued its review of the sector. Some banks slammed the action and said investors should find analyses elsewhere.
Moody’s cut 15 banks from one to three notches, citing the risk inherent in the bank’s global capital markets operations. The ratings agency had said several months ago that it would be reviewing the sector. Later, Moody’s also cut a division of Lloyds TSB Bank, Reuters reported.
Morgan Stanley took a two-notch hit but saw its share price gain as much as 4.6% in extended trading because the bank had expected a three-notch downgrade. Financial services analysts with securities broker-dealer Keefe, Bruyette & Woods called the bank “a winner” compared with the other banks after the downgrade.
“Of the U.S. banks, Morgan Stanley is the clear winner as the bank received only a two notch downgrade versus the three notches that had been anticipated,” KBW analysts wrote on Thursday. “JPM, C and GS all received a two notch downgrade as expected and BAC’s one notch downgrade was in line with expectations as well. We believe Morgan Stanley will trade up on the news and likely outperform its peers on Friday.”
The Moody’s bank downgrades hit the following institutions: Bank of America Corp. (BAC); Barclays; BNP Paribas; Citigroup; Credit Agricole; Credit Suisse Group; Deutsche Bank; The Goldman Sachs Group; HSBC Holdings; JPMorgan Chase & Co.; Morgan Stanley; Royal Bank of Canada; Royal Bank of Scotland Group; Societe Generale; UBS.
After Moody’s warned of the coming action back in February, Morgan Stanley (MS) stock lost nearly 27% of its value; it also has lost dozens of financial advisors in recent months. In Friday trading, MS stock was more than 2% higher at $14.26 in midmorning versus its Thursday close of $13.96. All bank in the group were higher in a relief trade.
KBW ranked JPMorgan as a second-place winner after the ratings move, saying that although the downgrade was in line with initial expectations, investors were “moderately concerned” about the bank’s $2 billion derivative trading loss and CEO Jamie Dimon’s subsequent testimony before Congress.
“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,” said Greg Bauer, Moody’s global banking managing director, in a statement. “However, they also engage in other, often market leading business activities that are central to Moody’s assessment of their credit profiles. These activities can provide important ‘shock absorbers’ that mitigate the potential volatility of capital markets operations, but they also present unique risks and challenges.”
In addition, Lloyds TSB Bank saw its credit rating cut to A2 from A1, with a negative outlook. Moody’s cited a number of reasons for its action, including Lloyds’ sensitivity to challenges in the U.K. and Europe.